House Hacking: A Lucrative Passive Income Stream for Young Professionals

Today’s post is a guest post from fellow Minnesotan Erik who runs the blog and podcast The Mastermind Within. On his site, he shares tips and strategies to unlock your full potential in the areas of personal finance, self-improvement, and entrepreneurship. He loves to help others, and uses his site as an outlet for this passion.

In this post, Erik shares how he created a passive income stream of $15,000+ a year after finishing grad school and commanding a high salary, and how you can create passive rental income with house hacking.

The timing couldn’t be better with college grads about to start med school, graduating medical students about to start their residencies, and graduating residents looking to start their careers under a big pile of debt. Could house hacking be right for you?

Let’s see what Erik has to say.

First, I’d like to thank the Physician on FIRE for giving me the opportunity to share my story with your readers. I’m excited to share with you how to create another income stream with your high salary and house hacking.

I’m guessing you are like me: always looking for the next best thing to include in your life, never settling. Each day, excited to wake up and experience the thrill of the chase. When you find that new, amazing brew, it is so fulfilling, and, oh, so very tasty.

I’m not one to sit around and wait for those around me to help me out. There’s always something to learn or do, which will result in being a little bit better.

After finishing graduate school, I applied the same mindset to my finances. Even though I had student loan debt, I was able to leverage my relatively high salary to create more income – I bought a house and rented it out to my friends. In this post, I will be sharing with you my house hacking story, the benefits of house hacking for a high-income individual, and how you can house hack.

What is House Hacking?

First, for those unfamiliar with the term, house hacking is buying an owner-occupied property and getting paid to live for relatively cheap or free.

How are you able to live for relatively cheap or free? You get a house which has rental potential, and rent out your additional rooms or units to other people (friends, Craigslist people, strangers, etc.) House hacking allows you to get into the real estate game, and at the same time, have your housing subsidized by roommates or tenants.

My House Hacking Story

It was the summer of 2015; I’d just graduated with my Master’s degree and had been working full-time for about 5 months. At 22 years old, my salary was $63,000 – above average for a fresh college grad.

As I mentioned in the intro, I was paying down my student loan of $15,000, but wanted to push the envelope.

Over the past few years, I had been reading about different wealth creation strategies. Real estate seemed to be a great way to build wealth. I was renting at the time and my friends, and it was time to find a new place to live – we were interested in moving to a vibrant and hip community in a different part of town.

The problem was there were no available options for 4 people where we were looking.

Then, a crazy idea popped into my head. I was sitting on the couch with my buddy and said to him, “Hey, I know we are kind of struggling with the whole apartment search… I wonder what I could buy.” That set off the search for a house…

First, let’s dive into the numbers. My mortgage payment (PITI) was $1,820 a month. My roommate situation changed a few times over the years, but on average, I was bringing in roughly $1,450 a month.

This means, for me, I was essentially paying myself $370 in “rent” and banking the gains in appreciation and equity. $370 in rent? That’s unheard of in a metropolitan area such as the Minneapolis / Twin Cities area!

Diving into the Numbers Deeper

Over the past three years, I brought in just over $39,000 in rental income. I didn’t do anything special to earn this money – all I did was purchase a house in a great area and rented it out to 2-3 of my friends.

I was being paid to live, a great deal!

As I mentioned above, my housing expense was quite low, and actually, because I was paying down my mortgage each month, I was coming out ahead every single month. I was building equity in my house at $500 a month, with only $370 out of pocket – again, a great deal!

Combining the rental income, the reduced housing cost, and my relatively high salary at my day job, I was able to throw an extra $2,000 a month at my student loan debt. With rent coming in at the beginning of the month, I was able to make extra payments on my debt, make other investments, and save up money for emergencies more effectively.

Cash (flow) is king. Being able to bring in extra cash each and every month is so critical if you want to get ahead financially (and it’s amazing to do it passively!)

Other Comments on My House Hacking Experience

I was lucky to have some great tenants and fortunate none of the big appliances (furnace, water heater, etc.) went out on me.

I don’t think house hacking is for everyone, but it’s something I would recommend to everyone.

Being a landlord and renting out rooms to your friends or strangers can be a good experience, and I’d recommend having a roommate agreement and lease in place for legal and protection purposes. My roommates were solid gentleman, but if someone doesn’t hold up their end of the deal, you need to have some sort of document in place.

The Benefits of House Hacking for High-Income Professionals

I’ve talked about a number of ways that house hacking benefited me, but I want to talk more in general now about how house hacking can benefit a high-income professional like yourself.

There are 3 main benefits of house hacking for high-income professionals:

Tax Benefits

Increased Cash Flow

Exposure to an Appreciating Asset

Tax Benefits of House Hacking

(Disclaimer: I’m not a tax professional, the following is my opinion and me sharing my experience. Everyone’s situation is different.)

When you have a high income, tax efficiency is critical. With house hacking, you will be increasing your income, but not necessarily increasing your debt burden.

Even though I was bringing in, on average, $1,450 a month, I was able to offset this by my house insurance, private mortgage insurance, interest, and depreciation. In addition to these expenses, I was able to claim additional expenses for repairs and improvements.

When you are being taxed at 25-30% or higher, it’s crucial to keep your adjusted income low. House hacking allows you to do this.

Increased Cash Flow through Passive Income

Unfortunately, many of the readers of Physician on FIRE are riddled in student debt. Even with a high income post-graduation, it’s still crucial to have a positive cash flow and always be looking to improve your financial situation.

By effectively eliminating, or at the least severely decreasing your house expense, you free up thousands of dollars a month to better your debt situation or put money towards your investments.

Gaining Exposure to an Appreciating Asset

One of the most asked questions in personal finance is “Should I pay down debt or invest?

With house hacking, you add an appreciating asset to your balance sheet, while maintaining the ability to pay down your debt.

In the 3 years of owning my house, I’ve increased my net worth by nearly $100,000 by house hacking through the combination of appreciation (roughly $60,000) and mortgage pay down (roughly $30,000). Throw in the facts that I’ve continued to increase my salary in my day job, paid off my consumer debt, and am saving for the future, at 25, I’ve created a fantastic financial base. Now, I am set up to crush my goals of financial freedom and independence.

House hacking has allowed me to do all of these things at a young age. I know you can do this too.

How You Can House Hack

Anyone can house hack if they want to. I’d recommend house hacking because it’s both a boost to your income and it’s an investment in real estate. You improve your cash flow, and get invested in one of my favorite asset classes.

Why do I like real estate as an asset class? Real estate is:

Accessible – Anyone can buy it

Appreciable – Can increase in value over time

Leverageable – You can buy on margin and borrow against equity

Rentable – Cash flow baby!

Improvable – Through sweat equity or contracting out

Deductible/Depreciable/Deferrable – Amazing tax benefits as we went over above.

Looking for duplexes in your area, or homes with extra rooms you can rent out are fantastic ways to get started with house hacking.

In addition, I would also recommend reading different books and blogs on real estate. Continuously learning will help you become more familiar with the various real estate investing concepts.

Can I interest you in more articles like this? Grab a free subscription and you’ll get notifications of new posts, a quarterly newsletter, and a free excel spreadsheet full of calculators.

Conclusion

House hacking is a great way to build wealth at an early stage in your career after graduation.

At the end of the day, house hacking is all about reducing one of the main 3 big expenses: housing, transportation, and food. Focusing on reducing these will have the biggest impact on your financial situation.

The best time to plant a tree was 20 years ago; the second best time is today.

For high-income professionals, there is so much potential to get ahead financially. Don’t settle with just a high salary – keep pushing, look to create passive income streams, and enjoy the ride.

And finally, don’t forget to keep searching for that new great brew! 😉

PoF: Thank you for the educational post, Erik. I’m glad “house hacking” has worked out well for you. Readers, do you have any similar tales of success or failure with this type of housing arrangement?

Again, be sure to check out Erik’s blog and podcast at The Mastermind Within, where he shares tips and strategies to unlock your full potential in the areas of personal finance, self-improvement, and entrepreneurship.

33 comments

While I can’t say this applies to me right now while I live in an 1100 square foot house with my wife, three kids, and two dogs… I can say I’ve thought about this at the next house we buy. Maybe rent out the basement (mother-in-law suite)? Or have a guest house behind the house? May possibly increase the price of the house, but the rental income would likely make up for that.

It has always been appealing to me to have passive income, but being a landlord of sorts has always worried me, too. There is no way for me to guarantee that I can find a friend (or someone I know) who needs a place to live. I do live near a large medical center with lots of students and residents, though.

Thanks for the broad overview. If I were to go back to medical school… this is exactly what I would have done before I got married! And maybe even after before we had kids. Would have been perfect.

A duplex or side by side split home might work as well, but that would depend on where you are in the country.

Like you said, the passive income piece sounds really good, but if there are issues, then, because you have a demanding job and incredible income, is it really worth the additional headache? I don’t know – I’ve decided to stop house hacking now that I’m dating someone special and have grown my income.

Like the Physician Philosopher I always thought about renting out my basement and doing this but to be honest, I’m too much of a private person. And by the time I seriously considered it I already had a nice net worth and the benefits didn’t seem as necessary.

That said, if I were starting over I’d consider it again. Being that your home is one of the “big three” expenses, saving massive amounts on it can really super-charge your way to FI. Well done!

Nice. Too late for me to do this now, but wish I had done so in my younger years instead of just renting everywhere. Was much too focused on mobility in my younger days – which helped me a lot in making upward career moves fast.

All things in life have opportunity cost… honestly right now, 3 years later, I wouldn’t mind not being tied to my house (even though it’s in a great spot and I have a great interest rate on my mortgage)

Mobility to move to different locations and/or companies is really important – it’s why I’m not really considering leaving my current role since it’s so close to my house!

I’m glad it worked out for you and you essentially got subsidized rent.

A caveat though is you can’t always anticipate real estate appreciation like what you realized. And of course renting out to friends can sometimes be problematic as they expect you to be more lenient if they are unable to make the monthly payment.

I think the majority of times you will come out ahead with house hacking but as with any investment there are some risks

Definitely agree with you Xrayvsn on the appreciation – I certainly bought in at a lucky time and experienced some good growth.

With all investments there is risk -> really, the big wins were in the income, tax and cash flow categories:

– able to bring in ~$40,000 in essentially tax free income (after deducing mortgage interest, maintenance, etc.) – able to put the majority of that $40,000 into paying down debt / investments – having more flexibility and another income stream outside of my day job

Even if my house value went down, now I’m in a place where I’m still debt free (outside of the mortgage), have a house, and have more equity in the house.

Back in college, I did some house hacking. I was living in a single family 4 bedroom home and I rented out the rooms to a few friends.

For a short time after residency, I did something similar to house hacking (but not in the traditional sense). My wife (back then she was a gf/fiancee) had a friend who went to study abroad for a year and he wanted somebody trustworthy to live in the house. So he asked my wife. All he asked for was that she pay for the utilities. He was pretty wealthy, so wasn’t looking to make money.

The house was very close to where I worked, so I stayed there with her. I paid half of the utilities. It was beautiful. I think I only paid $50 a month for a nice house with a great location. Is that consider house hacking? Reverse house hacking? What would you call that? 🙂

I did something similar, but I rented out my room to 4th year medical students who were doing rotations and to a couple of lab geeks from other countries. Made some great friends that way. benefits.. 1. they paid part of my house payment 2. someone there in the house when I was working a billion hours a week in residency and later when I was traveling 3. prescreened in a way… after all, they PROBABLY are not serial killers if they are med studs or phd people 4. they typically did rotations for 4-6 weeks, so if I was getting tired of living with someone or needed privacy, it was a limited interaction in a way.

Worked out great for me… At least paid my house payment even if I didn’t make a lot of extra off of it..

@rita: We’re doing the exact same thing with our spare bedroom – renting it out to rotating 3rd and 4th years. It’s pretty fun, and just about when they’ve worn out they’re welcome it’s off to the next rotation!

Also we got some free dog care for weekend trips while the student stayed at the house 🙂

Great content. Not only am I believer I am also a house hacker!! I have been house hacking since 1999. Even to this day I have a couple renting out the spare room and also the living room. Making more rent money from them because they have all their stuff in the front room. Sure this is way beyond some people’s comprehension and others would never have my lifestyle. The sacrifice I take in my living standard at home allows me to travel 200 days a year. I look at it like dieting and working out. You think it’s enjoyable to wake up at 5:30 am to go to the gym before work or school? Is it enjoyable to eat your salad from home instead of going out to eat with co workers? No, but the benefits you have from being fit and healthy in the long run make you sustain a longer fuller life. Sacrifices and self discipline at an early age will pay max divedends in the future. Stay focused on the reason why. Cheers

You are totally right – to be successful, it’s not necessarily doing something extraordinary. RATHER, it’s just doing something a little bit different and being a little bit outside of your bubble and comfort zone (where others don’t dare go)

Thinking back, I started real estate, when I was in college. I rented a nice two bedroom and leased one room to a girl by posting on campus. My first house was a two family house, which we rented the upstairs. We never worried about making mortgage payment because it was all covered by rental income. Now we have been over 10 rentals, which we enjoy the passive income.

Bigger Pockets and Erik are on to something, but this isn’t right for everyone, in particular the brand new doctors that are called out at the beginning of the post. These new residents or attendings are rarely equipped to put any significant down payment on the table, which means they’re really hitting the interest hard instead of building equity with their first chunk of mortgage payments. What happens when you have some vacancies in your income property and you’ve got a mountain of student loan debt, too?

With maintenance costs, property taxes, insurance, and risk of vacancy, making your first home in your career an income property can be a little risky. You’ve really got to be on sound financial footing to consider this. The average new physician has $190,000 of student loan debt.

The other consideration may be family/privacy related. I would consider sharing some rooms in a house if I were in my 20s and still a bachelor, but not now that I’m in my 30s with a wife and young children. Married or not, most new attendings are a bit older and may not still be in that phase of life where sharing a pad with some friends is fun.

Not that our decision is right for everyone, but we’ve found a cheap rental that we love for now and are plowing as much of our income as possible into our volcanic mountain of medical school debt. Good thing, too – we’ve had several major appliance failures, a garage door, and some storm damage to our rental already, which we have been able to shrug off while continuing to put every cent we can spare into loan payments. Hopefully that will be done soon and we can focus on getting together something resembling a down payment.

It’s definitely not for everyone, and with real estate prices going up, I’m afraid that we might be entering a time (a short period) where this might be unreasonable.

That being said, thinking about how lenders view mortgage applicants, because of an incredibly high salary out of school, if a graduate can save cash vs. plowing extra into their loans ($25,000 to $50,000) and make a purchase in their first year, then this can potentially work… and that’s the point of the article in my opinion.

If you have a $2,000-$3,000 a month student loan payment, but are making ~$15,000 a month as a resident, then a bank will look at you and say they are comfortable lending you a loan which would amount to $3,000 a month (for a total of 40% debt to gross monthly income – in the reasonable range for someone with a mortgage)

For $3,000 a month, that’s a decent sized house or duplex in many areas in the United States.

Like you said, to consider this, you need to be dang sure you have your financial ducks in a line, otherwise there could be some big mistakes and issues that would interfere with your work and finances.